S&P Raises Neftepolis Outlook to Positive; Affirms ‘B+’ Ratings

June 7, 2007

Standard & Poor’s Ratings Services has revised its outlook on Russia-based insurer Neftepolis Insurance Co. LLC to positive from stable, “as a result,” said the announcement, “of closer integration with Russia-based SOGAZ Insurance Group, with which the company merged in 2005.” S&P also affirmed Neftopolis’ “B+” long-term counterparty credit and insurer financial strength ratings and its “ruA+” Russia national scale rating.

S&P noted: “The ratings on Neftepolis reflect the high industry and country risk factors of operating in The Russian Federation (foreign currency BBB+/Stable/A-2, local currency A-/Stable/A-2, Russia national scale rating ruAAA) and Neftepolis’ weak financial flexibility.”

However S&P indicated that these factors are mitigated by “Neftepolis’ marginal quality of investments, solid track record of good operating performance, potentially strong competitive position and ability to go from strength to strength in its oil-related insurance niche, and strong management team.

S&P credit analyst Tatiana Grineva indicated that the “positive outlook on Neftepolis reflects the company’s closer integration with SOGAZ, which has exceeded our expectations.” However, S&P conditioned the upgrade on the following expectations:
— Neftepolis is expected to continue being successfully integrated into SOGAZ, and ongoing parental support should be provided for Neftepolis’ growth and development, including financial support if such a need arises.
— The commercial book is expected to represent significantly more than 50 percent of gross premiums written where Neftepolis has competitive advantages, particularly in its oil-related insurance niche.
— Although the former parent, Russian oil company OJSC Oil Company Rosneft (BB+/Developing/–), is likely to remain as one of Neftepolis’ major clients, reliance on Rosneft’s premium income is expected to lessen, with the company expected to contribute less than 30 percent to overall gross premium income by 2010.
— Good profitability levels are expected to be maintained.
— The quality of the investment portfolio is expected to be maintained at least at its current level.

In conclusion S&P said: “The ratings may be raised if the potential material benefits arising from Neftepolis’ merger with SOGAZ are realized. The ratings may be lowered, however, should some of the expectations outlined above continuously fail to materialize in the medium term; in particular, deterioration in capitalization or in the quality of the investment portfolio.”

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